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Minimum Essential Coverage Plans: Are they legal under the ACA?

The Affordable Care Act requires "applicable large employers" (ie, employers with 50 or more full-time or full-time equivalent employees) to offer "minimum essential coverage" (MEC) to its employees. If the employer does not offer the required coverage, it will be subject to a $2000 per year penalty if any one of its employees obtains a premium credit to purchase health insurance through a health exchange after January 2014. Just what qualifies as "minimum essential coverage" has been a question since the ACA was passed.

Even if the employer offers a health plan, the employer may still be subject to an unaffordable penalty if the offer of health coverage fails the "unaffordability" test. That test is two-fold. The premium cost of employee-only coverage must be less than 9.5% of the employee's household adjusted gross income. The plan itself must also cover at least 60% of the average medical expenses incurred by an average person over the course of one year. This 60% rule is known as the "minimal value" requirement. If the offer of health coverage fails to meet one of these requirements, the employer may be subject to a $3000 per year penalty if that employee obtains a premium credit to purchase health insurance through a health exchange after January 2014. Note that this penalty does not apply to every employee like the $2000 penalty described above. This penalty only applies on a case by case basis.

A plan that meets "minimum essential coverage" may not meet the "minimal value" test. Why would an employer purposefully implement a plan that met the MEC requirement but flunk the 60% "minimal value" test?

Because the cost of putting such a plan in place may be less expensive than the cost of paying the "no offer" $2000 per employee penalty AND the potential "unaffordable" penalty they may pay if the plan fails the 60% minimal value test.

Huh? We like to call these plans "aluminum plans" (as opposed to bronze, silver, gold, or platinum) or as the WSJ termed them "skinny" plans. Consider the WSJ:

But, the new law has created a complicated web of rules that can affect companies, workers and the broader market for health insurance. Here are some questions and answers about how the bare-bones plans might work.

1) What is the bare minimum companies need to cover to avoid the broad, $2,000 penalty?

To meet the most basic requirements and avoid the new penalty, companies must offer a health plan that covers a set of preventive services recommended by a government task force, has no annual or lifetime dollar-limits on benefits, and is “employer-sponsored,” Treasury officials said. In the law, it’s called “minimum essential coverage.”

2) How much would it cost?

Estimates from benefits advisers price the overall cost per worker of the most minimal plans at about $400 a year, according to a theoretical estimate by Pan-American Life Insurance Group. Other plans, such as one offered by Dallas-based Group & Pension Administrators, would add in benefits such as physicians services and generic drug coverage, and cost about $1,200 a year. The entry-level price for what most people would consider comprehensive coverage is about $3,000 a year for an individual.

When you compare the after-tax cost of these plans with the non-tax deductible cost of paying the penalty, the economic benefit of the plan is clear. But, what about the "unaffordable" penalty that is $3000 per head? If all the employees go out and obtain a premium subsidy, the employer will end up paying a higher fine than he would if he offered no coverage. That is true. But, how likely is that to happen?

Health insurance coverage obtained with the premium subsidy will still be expensive coverage for these individuals. For example, a individual making $10 an hour and working forty hours a week, would still be required to pay almost $100 per month for a health plan even after the premium subsidy. Many of them simply will not buy it. Employers in construction, agriculture, retail, and hospitality industries learned long ago that their employees do not value health benefits highly. Employers in these industries have great difficulty getting employees to participate in their health plans even if the premiums are minimal. Even if a few employees obtain premium credits, that number (as long as it is a small number) multiplied by $3000 will be far less than $2000 multiplies by all of an employer's full-time employees.

The very possibility of these MEC plans is established by the bare bones definition of Minimal Essential Coverage included in the law and its regulations:

Section 5000(A)(f) of the Internal Revenue Code states that minimum essential coverage can consist of either (a) government-sponsored coverage, such as Medicare or Medicaid; (b) an “eligible employer-sponsored plan”; (c) a plan “offered in the individual market within a State”; (d) a “grandfathered health plan”; or (e) anything else that the Secretary of Health and Human Services deems appropriate.

What is an “eligible employer-sponsored plan?” Paragraph 2 of Section 5000(A)(f) defines one as “a group health plan or group health insurance coverage offered by an employer to the employee which is [either a government-sponsored plan] or “any other plan or coverage offered in the small or large group market within a State.”

This is a pretty open definition right now. This allows the MEC plan to be priced very cheaply. Could Health and Human Services narrow that definition? Absolutely. Having a Plan B would be a good idea. Isn't this a bad deal for employees?

Absolutely not! First, this is a plan that an employer could offer in lieu of offering nothing. Second, it would not preclude the employees from going to the exchange and obtaining a premium credit for a major medical plan if they so choose. We think this is a real option for employers struggling to find a way to deal with the oncoming train that is the ACA.